Seanad Éireann debate -
Wednesday, 30 Jun 1976

Vol. 84 No. 8

Organisation for Economic Co-operation and Development (Financial Support Fund) (Agreement) Bill, 1976: Second and Subsequent Stages.

Question proposed: "That the Bill be now read a Second Time."

Minister for Finance (Mr. R. Ryan)

The purpose of the Bill is to approve the acceptance by the State of the agreement establishing a financial support fund of the Organisation for Economic Co-operation and Development and to provide for the participation by the State in the fund. The text of the agreement is set out in the Schedule to the Bill.

At the outset I wish to make two points. First, this agreement has not yet come into force. Indeed, given the majorities necessary to bring the agreement into force it is likely to be some time before the fund comes into operation. Secondly, it is certainly not expected that Ireland will be seeking finance from the fund if and when it is set up. Our purpose in supporting the agreement is to involve ourselves, with our OECD partners, in what we see as a useful international co-operative measure to boost confidence in the international system. Of course, should the agreement succeed in this objective all member countries will benefit.

The idea of a financial support fund emerged in the context of the very large balance of payments deficits recorded by many industrial and developed countries following the quadrupling of oil prices in 1973 and 1974. One of the main effects of these increases was to cause a sudden and unprecedented transfer of wealth from oil-importing to oil-exporting countries. Since the oil producers as a whole were in the short term unable to absorb imports of an equivalent value from the oil consumers, many of the oil-consuming countries, including Ireland, were faced with the problem of financing the corresponding deficits in their balance of payments. In the event the recycling problem as it came to be known—the passing of funds from oil importers to exporters and back again either directly or by way of loans through the international money markets—did not create any major payments crisis. Nevertheless doubts about the ability of individual countries and the international financial system in general to manage the massive flows of capital involved did contribute to the air of uncertainty current at that time.

In this situation the agreement to establish the OECD Support Fund was seen as indicative of the industrial countries' intention to work together to meet the problems facing the world economy. Thus, although the immediate need for a fund is now less, the carrying through of the original idea will serve to lessen the pressure on member countries to resort to unilateral measures to reduce deficits in their trading balances.

International co-operative measures of this kind do not of course remove the necessity for prudent financial policies in each country. What the fund is designed to do is to contribute the kind of stability to the general international financial atmosphere which allows each country to adopt the internal policies appropriate to its situation.

Let me now briefly describe the main features of the fund. Membership of the fund is confined to OECD countries and all the member countries of the OECD, including Ireland, have signed the agreement setting up the fund. The majority of OECD countries have taken the necessary measures to implement the agreement. Most of these countries have in fact gone on to ratify the agreement. The agreement will come into force when member countries with at least 90 per cent of the quotas making up the fund have ratified it. The agreement may also be brought into force for themselves by the unanimous decision of at least 15 member countries of the OECD with at least 60 per cent of the quotas who have ratified the agreement.

The basic function of the fund as such is to lend money to member countries who cannot finance their balance of payments deficits from normal sources, that is, it will be a source of last resort. Applicants for loans will be expected to have first drawn down all other reasonable sources of finance.

The fund will be financed by member countries on the basis of quotas assigned to them. A member country's quota reflects its relative economic weight. The total of quotas, amounting to 20 billion Special Drawing Rights of the International Monetary Fund or £13 billion at current exchange rates, constitutes the fund. Quotas determine a country's: maximum liability to lend to the fund; general level of access to the fund's resources; and voting rights. Ireland's quota is SDR 120 million or about £80 million, that is, 0.6 per cent of the total.

In the event of the fund approving a loan to a member country, the fund will raise the money needed in two ways: either on the basis of the collective undertaking of all the member countries, or; from individual member countries directly.

Should the fund seek direct financing the member approached has the option of making a direct advance to the fund or providing an individual undertaking on which the fund can borrow the necessary amount. It is envisaged that the fund will normally proceed on the basis of undertakings from the member countries. There are elaborate provisions in the agreement to ensure that the burden of providing finance for loans and risks on loans made by the fund will be shared by member countries in proportion to their appropriate quota level in the fund.

Loans by the fund will be subject to stringent economic policy conditions and the approval of different voting majorities of member countries depending on the amount of the loan to be provided. Voting is on the basis of quota strength but for most decisions a majority of the members as such is also required.

The lending powers of the fund will continue in force for two years from the entry into force of the agreement. The agreement may, however, be amended and its lending life perhaps extended by a unanimous decision of the members subject to the completion of any further legislative processes which may be necessary should this occur.

The fund will be run by a governing committee on which all the members will be represented. There will also be an advisory board. The secretariat will be provided by the OECD. The fund will have the usual immunities and privileges of an international organisation.

Let me turn now to the provisions of the Bill.

The arrangements in the Bill are similar to the arrangements which apply to the International Monetary Fund and the EEC medium-term assistance schemes. In brief the Central Bank of Ireland will handle the State's financial transactions with the fund up to the winding up of the fund. The administrative arrangements in this connection will be settled in discussions between the Central Bank and my Department. In view of the acceptance of final liability by the Government in section 6 of the Bill, any policy decisions will of course be a matter for the Minister for Finance and the Government, in consultation with the bank, as appropriate.

Section 1 defines the terms used in the Bill.

Section 2 approves acceptance by the State of the agreement.

Section 3 designates the Central Bank as the single monetary authority responsible for transactions between the State and the fund. Under the terms of the agreement each member country is required to designate such an authority.

Section 4 provides that the Central Bank shall on behalf of the State make any payments or provide any undertaking to the fund as and when it is necessary to make such payments or provide such undertakings. The section also provides that moneys receivable by the State from the fund shall be paid to the bank on behalf of the State. These provisions do not apply to transactions arising out of the liquidation of the fund.

Section 5 gives the Central Bank the necessary powers to issue notes or obligations or enter into commitments in connection with the exercise of its functions under section 4. The section also provides for payments by the Central Bank in connection with the issue of such notes, obligations and so on.

Section 6 deals with the liquidation of the fund. The section provides in effect for the assumption by the State of its ultimate financial liability in respect of the fund's operations. It is of course most unlikely that an OECD member country would default on an international obligation and indeed the fund's existence is generally seen as aimed at reducing the possibility of such an unlikely event occurring.

Section 7 will enable the Minister for Finance, after consultation with the Central Bank, to bring the Act into force at the appropriate time.

Section 8 provides that any administrative expenses incurred by the Minister shall be paid out of moneys provided by the Oireachtas. In general administrative expenses are expected to be of a minor nature.

Section 9 gives the Short Title of the Bill.

The immunities and privileges of the fund will be covered in the usual form of order under the Diplomatic Relations and Immunities Acts, 1967-76.

In conclusion, I think it can be said that the OECD Financial Support Fund is a useful measure in which it would be in Ireland's interest to participate.

I recommend the Bill to the House for adoption.

Mr. Dolan

I wish to say merely that we on this side of the House welcome this legislation. We would not like to be out of step with our colleagues in the EEC. They have already considered this and considered it a necessary piece of legislation. From what the Minister has said in his speech it seems many of them have passed the necessary legislation.

It was found necessary to have the legislation because many people were annoyed and felt that because of this so-called international crisis many countries had great difficulty in meeting their commitments and keeping the balance of payments. As it is at present it seems to have transpired that this has not been fact and so far as I am aware this fund has not been set up at all. However, seeing that it has been adopted in other countries it is only right that we should play our part in contributing towards the setting up of such a fund. The amount expected is £80 million, but whether we will be ever asked to contribute that I do not know. If we are asked to make a down payment will we have the necessary finances to do so? I wonder in what state our credibility stands so far as the other member countries of the EEC are concerned? The last occasion on which we negotiated a loan abroad the EEC insisted that the other member States act as guarantors so as to ensure that the loan would be repaid. That may also apply so far as this fund is concerned.

I do not know how the country can benefit from its participation in this fund. I do not think we have as yet got into any difficulties in paying for oil. Perhaps the fund was found necessary in the past but the EEC countries do not seem to be over-anxious at present in this regard. However, we on this side of the House have no reason to object to what the Minister is doing. We are in full agreement with the Bill.

Mr. M.D. Higgins

I do not intend to delay the House on a Bill which has been received without controversy in the Dáil. The Minister will excuse me, I am sure, if I advert to the fact that this Bill is an arrangement between Ministers for Finance within the OECD and it reflects a necessity for harmony in international arrangements for the shifting of finance. One hopes that OECD Ministers will reflect an equal emphasis in the future on the necessity for a harmonisation on the right to life being possible. I have an opinion on this matter. When it comes to international negotiations complex financial harmonisation arrangements are often made whereas when it comes, for example, to the shifting in real resources, towards raising the level for nutrition in the poorer countries, progress is far slower and more lethargic. We would want to be very careful about the language we use. This Bill is not very important so far as we may not use it but the kind of problems it adverts to indicate a certain kind of emphasis and a certain kind of thinking which cause me some concern. The Minister says in his introductory speech: that the idea of a financial support fund emerged in the context of the very large balance of payments deficits recorded by many industrial and developed countries following the quadrupling of oil prices in 1973 and 1974. In my view it does not represent anything other than a very fine development to find that there has been a real transfer of resources between developed and industrial countries and the countries which, previously, were not developed and industrial. I am not falling into the trap of imagining that the people who gained the major benefits from the quadrupling of oil prices were precisely the countries to which I have just referred. I make the point, though, that this concern about the shift in resources which led to payments difficulties hides a number of factors which are not simple, which are quite subtle and severe. For example, one which the Minister's speech adverted to very cogently—the flow of capital which was brought about from the increased oil prices meant that the industrial developed countries, as they are referred to, were not producing what the other countries needed. What occurred then was a confrontation between two different kinds of consumer structure and production structure. It was a very good idea that many of the countries I referred to were not producing what could be paid for because much of what was being produced was in the wasteful luxury commodity category.

I look forward to the same kind of co-operation taking place in the other Member countries which will be other than a mere fiscal or financial one. The unfortunate phrase which was used by the Minister, who is a man of considerable intellect—"recycle of funds"—would seem to suggest that some kind of indigestion had arisen simply because the oil-producing countries decided suddenly that the opportunities were there for making a lot more money. We can do without these words. Many opportunities will arise in the future in which the dependant countries, the countries of primary production, will inflict far greater hardships on us and will demand more. It does not matter if we use new terminology to deal with it. It is probably useful in the short term that the major developed countries will find themselves in a shifting of financial resources situation and can manage to have strategies but this is not a long-term solution.

The idea of there being an international fiscal harmony which would reflect an international economic harmony presupposes altogether a restructuring of the world economic order. This would involve an order such as that being asked for by the representative of Tanzania. In a recent distinguished contribution one of their most distinguished economists has asked for such a change. The OECD's Observer in their last issue in relation to projections for the necessities for food as far as the year 1985 spoke, although it did not spell it out, if we could not sustain population among member states with existing resources for food production, nutrition, education and agriculture. I look forward to enabling Bills coming in here which reflect a more determined commitment from the OECD on these matters.

As one goes through the Bill one notes sections which cause some anxiety. To say that new economic structures will require new economic order when fiscal harmony takes its place is a statement which in my sense of values is rather low. Within fiscal harmony itself the Central Bank certainly occupies a low place in my opinion. In this context sections 4 and 5 are the appropriate ones. They provide that the Central Bank on behalf of the State shall make any payments or undertakings to the fund as and when it is necessary. I realise that the reply which will be given to me here by the Minister is that the Central Bank will take an administrative act to implement a Government decision of the day. I understand that that is the kind of interpretation one would fall back on.

It is appropriate at this stage that the Central Bank has not in fact seen itself in such a subservient role. Its history in the last two or three years has been called much into question as to the relationship between the administration and the Legislature. Apart altogether from the necessity for a new Central Bank Act—something to which I hope the Minister will address his attention soon—it is perfectly clear that on those many occasions when people who were in charge of administrative functions within the Central Bank took it upon themselves to make comments upon what was a legislative decision or on what was appropriate Cabinet policy they were not restrained by any conception of an administrative role. I would just advise a little care as to where their powers are referred to in this Bill. I agree with those people who have said the Bill is one which should not detain us long, future Bills are mentioned which might express more meaningful restructuring of an international economic order. These would be very welcome and would be debated at much length when introduced.

Mr. R. Ryan

I am grateful to the House for the reception of the Bill. I want to emphasise once again that there is little likelihood that Ireland will have any occasion to avail of their rights under this Bill. The right of the State to avail of the opportunities under the Bill would arise only if a State were refused access to moneys by all other agencies, national and international. That is why the fund was described originally as a safety net to stop from falling to the floor a State which was collapsing. We are not in that position. We do not anticipate that we will be in that position. We will make certain that we will never get into such a position because we will work hard enough and arrange our affairs in a manner which will avoid that happening.

There is similarly little likelihood that Ireland would ever be called upon to advance the £80 million which is our quota under the provisions of the fund. That £80 million would only arise if the remainder of the OECD had got itself into such a mess that the OECD had to use up the whole fund of £13 billion and then be unable to repay it. It is unthinkable as we know the present and potential developments of the world that that situation will ever arise, but of course it could. Even if it did arise, in respect of £80 million or any other sum and the OECD were to require this country to fulfil its obligations under the Financial Support Fund we would have a choice either to advance the money directly if we happened to be in the lucky position of being able to enter into the money-lending business, or we could simply subscribe to a guarantee or an undertaking which would be necessary to enable the fund itself to borrow from elsewhere. Therefore, the impact on us is likely to be minimal if it arises at all.

Most of the countries of the OECD have moved into a very healthy situation now in respect of their balance of payments. Of course it might not always be so because as recovery accelerates it is probable that trading deficits will grow again. The recession has concealed the fact that oil deficits for most OECD members are now very much greater than they were prior to 1973. Last year, for instance, our deficit was only £15 million and had we not had the quadrupled oil bill to pay we would have been in the position of having a surplus on our trading account of the better part of £200 million which, of course, would have been an extraordinary position, one regarded by orthodox financiers as a wonderful position to be in. But, of course, it is to be seen that we could achieve that position only at an unacceptable price of too high an unemployment rate and under-use of our capacity. Consequently, while financially the year from a payments point of view looked healthy, it was economically most undesirable and we certainly do not have any wish to move into that position.

Ireland's right to avail of the fund exceeds £80 million which is our quota. We get £80 million on the votes of two-thirds of the members of the fund. We get £160 million with the support of 90 per cent of the members and it could go even higher if our circumstances were so serious as to warrant this and the fund was prepared to accept the burden of our responsibility of repayment if we should default, but, as I say, all of this is very much in the realm of theory, but one could probably walk a tightrope with greater confidence if you know there is a safety net underneath. Even that would probably prevent you from wobbling across the straight and narrow.

I would accept what Senator Higgins said about the obligation of the OECD to the Third World. The OECD comprises 22 of the wealthiest countries in the world and we have a moral obligation to provide assistance to them and the OECD countries individually and collectively are aware of this. It can be said that awareness is not enough— that we have not yet matched awareness with sufficient contribution—but the Senator knows that as far as this Government are concerned we have significantly increased our own contribution from Ireland to the Third World, even in times of economic and financial difficulty for ourselves. We have wished to see this programme of help advanced. But there is something more than a moral obligation involved here. Should there be some who will act, not on the basis of a moral obligation but on the basis of self interest, the better-off countries of the world must see to it that the remainder of the world is in a better position to consume the products of the wealthier nations. They will not be in that position unless there is quite a significant transfer of resources.

In relation to the quadrupling of oil prices, it can be argued that the price now charged for such a vital source of energy is a fair price. What was unfortunate was that the quadrupling of prices happened in such a short period without ample opportunity being given for the adjustments which were necessary. Even the oil-producing countries themselves have lost out by reason of the speed with which the price of energy rose. Of course it rose for political reasons and not for economic reasons originally. It was only as a result of a political decision that economic lessons were learned by both the beneficiaries and those who have to pay. In the operation of the Financial Support Fund the Central Bank will be, in the main, the agent for the Government. But the structure of the fund requires that an agency be nominated by each country to operate the mechanics of the fund. There is no institute in this country better equipped to do this than the Central Bank. I would not feel justified in setting up a new organisation to operate the fund if it has to be put into operation in relation to Ireland because what we would have would be a new institute. We have probably created too many in this country. We would have got a new one and it would have to remain idle until such time as the fund was put into operation by a demand being made upon it by some other country.

There are frequent consultations between the Central Bank and the Department of Finance on all matters affecting the economy and the finances of the country. As is common knowledge, I have not always found myself in agreement with some of the views expressed by the Central Bank and vice versa. That is not peculiar to this country; it is a fairly common experience. The Central Bank's function is not always allied with that of the people who have political responsibility. As long as we understand one another's separate areas of responsibility, then we can respect one another's point of view. It would be undesirable to have a situation arise in which the integrity of our Central Bank and of our currency could be put into question because it was felt, either at home or abroad, that it was subject to too much political influence. I am not for one moment suggesting that the Central Bank must not take account of the financial policy of the State. It must do it. In fact it does do it. It adjusts its own procedures and policies to conform, as best it can to whatever is regarded by the political masters of this country as being the correct policies of this country, for the political masters are those who have a mandate from the people; that is our authority and it is to the people of Ireland that we have that responsibility.

We are fortunate in this country to have a Central Bank which by tradition and in practice, observes the canons that ought to be observed by central banks. They have done that without interfering unduly with the political responsibilities which, in a democracy, must lie with the elected representatives of the people and with the people who are nominated by those elected representatives as their government. I am certain that, should it be necessary to operate this fund, the Central Bank will reflect the wishes of the Government and, of course, of the OECD but it will be our agency to operate the fund and I cannot think of any one to operate it. Any other institute would be unnecessary and costly.

Therefore I commend the Bill to the House for acceptance.

Question put and agreed to.

Agreed to take remaining Stages today.

Bill put through Committee, received for final consideration and passed.